Bank M&A has a big expectations problem.
Plenty of bankers want to buy, but few plan to sell.
Fifty-seven percent of bankers say they intend to make an acquisition over the next 12 months, according to a survey released recently by the accounting firm Crowe Horwath in association with Bank Director magazine.
But 89% of bankers say they have no plans to sell a loan portfolio, line of business, branches or bank.
Among-would be acquirers, 46% say they would buy a healthy bank, while 21% say they would like to pick up branches, and 17% say they would like to acquire a failed bank from the Federal Deposit Insurance Corp.
Pricing also present a roadblock. Sixty-two percent of would-be buyers consider unrealistic expectations by sellers regarding price to be the top barrier to buying another bank, while 59% say they worry about the asset quality of potential targets. Another 30% say they are reluctant to risk a deal in an uncertain economic environment.
As pospective buyers "are becoming a little more confident in the direction of certain aspects of the recovery and the performance of [their] nonperforming assets, there's more optimism from the buyers around doing a transaction and a sense that the time is right," says Rick Childs, director of financial institution transaction services at Crowe Horwath. "But pricing is reasonably depressed."
Would-be sellers think prices need to get better before they would entertain a deal, Childs says. "I don't think sellers think they'll get back to precrisis levels, but I think with the new norm, getting 140% to 150% of tangible book value would be an excellent outcome," Childs added.
The survey follows one by KPMG recently that found more than half of community bankers think they'll be involved in a deal within the next two years, either as a buyer or a seller.
Varying perceptions of credit quality hold down prices as well, Childs says, and deals that are getting done tend to include such arrangements as holding part of the purchase price in escrow or conditioning future payments on loan performance.
Bankers are also looking to expand beyond deposit-taking. According to the survey by Crowe Horwath, 39% of bankers surveying potential deals outside the banking business say they would like to buy an investment management or trust business, while 30% want to buy an insurance firm and 29% say they would like to pick up a residential mortgage origination business.
"If you can find a very solid mortgage operator who has a consistent pipeline, I think it could be an excellent business in terms of adding to fee revenue, but you have to really manage the risks in terms of due diligence in light of how much refinancing has been juiced in the past several years," Childs said.
Among those who would consider selling their bank, 21% say they no longer find the experience rewarding or enjoyable, while 20% cite the cost of regulation. Another 16% say they would sell because they see limited opportunities for organic growth.
The survey was completed by 234 bankers, including 104 outside directors and 40 chief executives. Roughly two-thirds of the bankers who took the survey represent institutions that have between $250 million and $5 billion in assets.